Alexander Belyaev (u0979372)

TABLE OF CONTENTS

Introduction Pg. 2

Social Security Fund History & Effect Pg. 2

Connection to Today’s Situation Pg. 3

Recommendations for Social Security Continuous Viability Pgs. 3-4

Outcome/ Conclusion for Social Security Continuous Viability Pg. 4

Retirement Plan- Why Do People Need It? Pg. 5

Recommendations for Own Retirement Plan. Pgs. 5-6

Outcome/Conclusion for retirement plan. Pg. 6

Conclusion Pg. 7

Appendix Pgs. 8 – 14

Sources Pgs. 15-18

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INTRO
Social Security affects every family and millions of American lives.
Social Security helps older people, disabled workers, and bereaved families. “As of June 2020,
about 180 million people worked and paid Social Security taxes, and about 65 million people
received monthly Social Security benefits. Most of the benefit receivers are retirees and their
families. In June 2019, their number increased to almost 49 million.” (27) It was not designed to
be the only source of income after retirement. Social Security replaces a portion of an employee's
pre-retirement income on the basis of earnings received during life.

In the last couple of years, American financial analysts were shocked by the news that the
U.S .Social Security Fund (SSF) experienced its first annualized asset decline since 1983, when
the U.S. Congress adopted special legislation and programs to strengthen the reliability of state
pension programs. The history is being repeated once again.

HISTORY AND EFFECT

Until the early 70s, U.S. wage growth outpaced price increases. But with the beginning of the
seventies, the situation changed to the opposite - real wages began to decline. The income of the
SSF, formed from the earnings of workers, could not provide the accumulated social obligations
of the of the past decades. In 1982, it became obvious that the budget of the Social Insurance
Fund would run out of money by the next year, 1983, and conversations began at the official
level that if urgent measures were not taken, the national insurance system would simply be
unable to pay benefits and state pensions (Exhibit 1).

To resolve the crisis, the National Welfare Reform Commission was created under the
chairmanship of Alan Greenspan. Greenspan's reform (Exhibit 2) not only patched a hole in the
U.S. state pension system, but changed the whole replenishment model of the SSF funds. The
fund has become one of the largest investors in the United States, and its income is largely
determined not by current employee benefits, but by income from investments and assets. Back
in 1983, it was a revolutionary solution to the problem. No one bothered to propose a new
concept of the pension system.

According to the Greenspan model of 1983, the main assets of the Social Security were invested
in U.S. Treasury securities. Then it was logical and justified - it is the most reliable instrument of
all that is present on the U.S. stock market, and at the same time it provided a certain return, a
low percentage of which was offset by a huge amount of assets. To date, the U.S. Social Security
Fund already has nearly $ 2.9 trillion projected deficit (Exhibit 3) between 2020 & 2035.

Since December 2008(yes notorious 2008 year), the Fed's discount rate has been at a quarter of a
percent. The yield on treasury bonds, closely related to the discount rate, did not exceed (or
almost did not) one percent per annum for several years. You don't need to be an economist to
link these factors and understand how those affected the economy of the U.S. social system.

2
CONNECTION TO SITUATION TODAY

Roughly speaking, in order to save the SSF, it is necessary to reduce all state pensions and
benefits by about 1/3. And this is the only way to bring the Fund's expenses in line with income
while maintaining the current model. Obviously, such dramatic and sharp reductions will not
occur, it is just too much of a restructuring to happen all at once.

As of now, the only available tool to solve the problem of the Social Security Fund deficit for the
U.S. administration is the anticipatory increase in the budget deficit and the government debt
covering it.

RECOMMENDATIONS FOR SOCIAL SECURITY CONTINUOS VIABILITY

Raising Tax Rates on High-Income Taxpayers.

PROS: Sounds like a great idea- right? Rich people would not stop their consumption and make
sure their lifestyle stays the same, even with higher taxes. That’s just how they are. In theory-
yes.

CONS: The problem with taxing high-income people is that it will affect the business they are
getting their funds from, meaning a negative impact on small business growth, employment
percentage and therefore negative impact on the economy overall.

Increasing the Retirement Age.

PROS: Higher retirement age = shorter time period social security has to pay for a person being
supported. People would be encouraged to work longer, therefore pay taxes longer and support
the economy. Less poverty, since people earn a lot more towards their retirement age and have
enough funds from the government to support themselves. Longer people work- more goods and
services they produce, therefore raising the living standards of the country.

CONS: Retirees simply have less time to enjoy their pension time, time for travel, time to spend
with loved ones. Need for a health insurance. Struggle with finding a job for old people, since the
older you get- the less productive you are=> limited work capacity. Hostile labor market for
older people.

Keep on Protecting Low Income Beneficiaries

PROS: Helping those in need- simply a moral thing. Reduce poverty. Better education- better
workers. Access for medical treatment= higher life expectancy. Child support.

CONS: A lot of manipulations and misuse of welfare programs. Money misallocation. Less work
motivation= bad for economic growth. Possibility of discrimination.

Decrease taxes on Social Security Income

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PROS: Fewer taxes on Social Security=> reduction in gross benefits. Shrink the benefit without
people being really affected= more $ for Social Security.

CONS: there will be a tax increase on people with wealth, taxing wealthier retirees = unhappy
tax paying people. No way to increase one benefit without decreasing the other.

Increasing the sum of maximum taxable income (Exhibit 4)

PROS: more funds= increased solvency of Social Security

CONS: taxation on higher class population = a lot of influential people not being happy with
their tax amount.

Increasing Payroll Taxes

PROS: more funding for Social Security Benefits

CONS: more taxation on middle class population => people will not be happy with it.

OUTCOME
It is impossible to save Social Security and make everyone happy at the same time.

Either put more tax on incomes of the rich people or do the same with middle class people. In
case of middles class- it could lead to protests, anarchy etc. In case of rich people- bad influence
on the country’s structure and economy.

No one in today's political America dares to touch the incomes of wealthy Americans. It's not
about the super-rich - just few people are afraid of them. We are talking about several hundred
thousand of those who act as grassroots sponsors of any election campaign - from the mayor of a
town with a population of several thousand to the presidential elections. It is they, and not
ordinary voters, who, with their money and resources, decide who will rule America.

It remains only to choose the lesser of two evils

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RETIREMENT PLAN- WHY DO PEOPLE NEED IT? (Exhibit 5)

1)No one can work indefinitely

With age increasing- productivity is decreasing. Certain companies have age limitations, since
not all of the old people are capable of physical loads needed for the job.

2)Health Issues (Exhibit 6)

About 78% of people aged 55 or older in United States have 1 or more chronic health conditions
according to National Center of Health Statistics. Health issues need treatment funds and could
prevent from working actively.

3)Be independent from others (Exhibit 7)

Older people are more likely to live alone in the U.S. than elsewhere in the world (5). Only 1/3
of them are financially comfortable.

4)Sevеral sourcеs of incomе arе nеeded аlong with pеnsion

Pеnsion doеs nоt cоver аll оf thе living еxpеnses: mоrtgage, trаnsportation, fоod etc. Thаt’s why
retirеes must hаve sеveral sоurces оf incоme, in оrder tо mаintain a cоmfortable lifе.

5)A lot of bank incentives, insurance companies and funds who promote saving money.
Big corporations need your money and promote savings options and bank accounts, which could
benefit them right now and account holders in the future.

RECOMMENDATIONS FOR OWN RETIREMENT PLAN

One has to start thinking about pension right when they start earning money. The faster they start
investing = more funds they get in the future for the retirement. All pension plans are divided
into 2 general groups (Exhibit 8):
A) Defined Benefit Plans
It implies the ability to receive a certain, fixed amount upon retirement. Most often, for various
reasons (wage level, inflation, etc.), it is calculated using the formula. It is believed that such
plans are the most difficult and expensive.

PROS: Secure, No affect from market Fluctuations, Tax Benefits from Employer, Improved
Retention, Spousal Support.
CONS: Can’t choose where to invest, Takes a lot of time, Not Portable, Expensive.

B) Defined Contribution Plans

In the second case, the pensioner will receive savings, which were deducted in the prescribed
amount. Most likely, the amount of deductions will be measured as a percentage of wages.

PROS: Automated, Tax Benefits+ Employer Match, High limits in case of contribution amount.
CONS: No guaranteed payout, Expensive Fees, Not a lot of investment options, Minimum
distributions requirements, Vesting schedule.
401K VS IRA (Exhibit 9)

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 I. 401K
Thе mоst pоpulаr pеnsion plаn in thе Unitеd Stаtes tоday. Thеse schеmes thаt аllow
onе wаy оr аnother tо sаve оn tаxes. Thе аdvantage оf a 401K plаn is thаt yоu cаn
mаke a contributiоn tо thе employеe's accоunt frоm wаges bеfore tаxation. Thus, by
choоsing this plаn, retirеe savеs pаrt оf his/hеr еarnings frоm tаxes. It оften hаppens
thаt аn еmployee dеducts a cеrtain amоunt, аnd thе еmployer mаkes a dеduction fоr
thе sаme amоunt (401K mаtch). This plаn hаs sеveral mоre typеs:
403B- subcategory for nonprofit organizations
457B -is a subcategory for government workers

II. IRA- Individual Retirement Account

means that a person independently deals with the issue of pension contributions.
Retirees open an account to which they transfer a certain amount. This can be a bank
account, a financial company, etc. Since this is a kind of investment, the dividends
they bring should be taxed. However, this is the beauty of the IRA plan - a deal is
made between the future retiree and the government, in which the capital gains
remain intact. The caveat is that the annual investment is capped ($ 6,000 per year for
2019). There are subtypes as well:

a) Traditional IRA plan, which assumes a tax deduction when you deposit into an
account (that is, this amount will not be considered for taxation now). In the future,
upon receipt of this money, taxes are paid on this money.

b) Roth IRA, which allows person to pay taxes before the contribution is made. But
with the further withdrawal of the pension, this money will no longer be considered
profit, which means that it will be exempt from taxes.

c) SEP IRA (Simplified Employee Pension Plan) or Simple IRA (less than 100 people
in the company), which are widespread among self-employed people/ small and
medium business owners.

OUTCOME
It's worth noting that some plans allow owners to withdraw money from an account until
retirement age. If the withdrawal of funds occurs upon reaching the age of 59, then the excise tax
is not levied on the funds. Also, American citizens have the opportunity to borrow from
themselves, using their account in a pension fund, and then pay off the debt at a certain
percentage. This feature can be used for necessary things like: cover health care costs (your own,
spouse, dependent), buying a basic home or renovating it, tuition fees, funeral expenses, etc.

6
CONCLUSION

Political and business circles in the United States have always been far from unanimous on the
role of the state in the field of social security. The approval of appropriations for social needs has
traditionally been the subject of a sharp internal political struggle. On social welfare programs,
health insurance, and other "social" budget items, the Democrats and Republicans are fairly
clear-cut and have not changed significantly over time. Republicans and the right-wing
conservative forces behind them view social programs in general as incompatible with the
principles of a market economy and usually advocate cuts in federal social spending. Democrats
emphasize the importance of social programs, improvement of the education system, medical
assistance to those in need.

Today, the need for government intervention in solving social security problems is no longer
questioned. The question is no longer about whether or not the state is needed, but about the
search for optimal methods of state influence on socio-economic processes. Even in recent
decades, with the revival of the trend towards personal responsibility for the self-sufficiency of
able to work citizens and the intensification of debate on the privatization of the pension system,
the most ardent supporters of the latter do not reject the role of the state in terms of the
guaranteed level of pensions, in insuring the risks of private savings systems, as well as in
regulating employment of pensioners as a form of their additional self-sufficiency.

There is no industry and no aspects of the social security system could be considered separate
from the ongoing and planned changes in the structure and forms of social security. Along with
supporting the state pension insurance system in the run-up to the aging boom and reforming the
welfare system, the key elements of domestic economic policy at the turn of the century were
economic incentives aimed at creating new jobs and the basis for economic growth in the future -
are measures, which ultimately contribute to increasing economic and social security of present
and future generations.

The reduction, limitation of the operation of certain programs of assistance does not mean a
decrease in state participation in the provision of social guarantees. On the contrary, the need to
modify programs requires strengthening government intervention in the process of redistributing
social protection funds and developing social guarantees adequate to the current and forthcoming
stage of social development, rationalizing social programs, diversifying their structure and
increasing their effectiveness.

The conclusions and recommendations formulated in RECOMMENDATIONS FOR SOCIAL

SECURITY CONTINUOS VIABILITY and RECOMMENDATIONS FOR OWN
RETIREMENT PLAN can contribute to the formation of more effective social security policies
by public authorities in U.S.A.

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 APPENDIX

Exhibit 1:

8
Exhibit 2:

9
Exhibit 3:

Exhibit 4:

10
Exhibit 5:

Exhibit 6:

11
Exhibit 7:

12
Exhibit 8:

13
14
Exhibit 9:

SOURCES

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